Dip forecast for industrial property yields

New warehouse development is being driven by third-party logistics providers coupled with the growth of e-commerce and the need to efficiently distribute parcels.
AFR

by
Larry Schlesinger

Prime industrial property yields are expected to tighten to below 7 per cent in 2014 as the sector continues to gain momentum.

The sector entered Christmas on the front foot after the floating of the $130 million
Australian Industrial REIT
– the first new property listing since 2007 – and
Charter Hall
growing its industrial property portfolio to $1.4 billion by acquiring three industrial properties from the
Cromwell Property Group
for $81.65 million.

Tempering this was Holden’s announcement its Australian production would cease in 2017, with an expected impact on warehouse demand and vacancy rates.

“There’s an interesting year ahead for industrial property," CBRE head of industrial property Matt ­Haddon said.

He said 2013 would go down as the year the sector moved back into favour.

Half a billion ­dollars worth of property was in due diligence, which was expected to be sold early in 2014.

Mr Haddon said the decisive federal election brought certainty to the market, which had begun its recovery in the last quarter of 2012.

“Prior to that, vendors were reluctant to offer their properties unless they were certain they would get a premium price."

Related Quotes

Company Profile

“Super prime yields will continue to compress and the volume of sales will rise because the demand is there."

Industrial land values rising

Goodman Group
chief executive
Greg Goodman
said rising land values would encourage more developers into the market in 2014.

New warehouse development was being driven by third-party logistics providers coupled with the growth of e-commerce and the need to efficiently distribute parcels.

“Around 30 per cent of demand is e-commerce related," he said. “Capitalisation rates have started to firm and to firm rather materially. We forecast that over [the] next 12 to 18 months, the average capitalisation rate of around 8.2 per cent rate will fall to well under 7 per cent."

He called Sydney the best premier investment market “without a doubt", particularly in land-constrained areas around Port Botany.

Goodman Group is active in this market, developing the Kingsford Smith Industrial Estate in Gardeners Road. It is also in the running for the Sydney Corporate Park in Alexandria that the Hannan family is expected to sell for more than $360 million.

Mr Goodman said he also expects the Melbourne and Brisbane industrial markets to perform strongly in 2014.

Investors ready to act

Malcom Tyson, managing director of industrial property at Colliers International, said institutional investors, which make up 47 per cent of total investment in 2013, would continue to dominate in 2014, with growing local private investor appetite.

He said institutions would look to restock land banks ahead of the next round of speculative construction.

“This should lead to 2014 being a period of strategic land acquisitions."

According to Jones Lang LaSalle’s head of industrial, Michael Fenton, ­outside the prime space, demand is expected to be strong for secondary assets with “value-add" capabilities.

He expects these will be the most frequently traded sub-class in 2014.

“Sellers will be a broad cross-section such as A-REITS selling smaller, non-core assets and private investors who purchased assets during the global financial crisis and can now sell for a significant profit."

He said prime yields would compress by about 25 basis points in 2014, with most coming from secondary industrial assets, where a tightening of at least 50 basis points in the next one to two years is expected, narrowing the gap between prime and secondary yields.

While a healthy pick-up in investment activity is tipped in 2014, rents are not expected to rise.

“Specialised assets such as cold stores, cross-dock facilities and food manufacturing are now more accepted amongst investors and are attractive due to their long-term leases and significant infrastructure, which usually results in the tenant staying well beyond the initial lease term."

Little rent movement expected

“Purchasers should expect generally stable rental growth in 2014. One of the key reasons for this is [a] steady addition to supply," Mr Tyson said.

A Colliers International snapshot of the national development pipeline at the end of the September quarter 2013 showed there were 411,000 square metres of large warehouses (10,000 square metres or more) under construction, with about 31 per cent of this in Melbourne.

Savills Victoria industrial leasing specialist Lynton Williams expects rents to stay stable until the current development pipeline is taken up.

“We won’t see significant rental growth but what we will start to see is more activity from owner-occupiers acquiring their own premises," he said.

Mr Goodman said he expected rents to rise between 2.5 per cent to 3 per cent in 2014.